Hart-Scott-Rodino (HSR) Act

The Hart-Scott-Rodino Antitrust Improvements Act of 1976, commonly called the HSR Act, is a federal antitrust law with rules created by the Federal Trade CommissionFederal agency responsible for enforcing consumer protection and antitrust laws, including HSR Act compliance. (FTC). The law requires advance notification to regulators for certain large business transactions. For hedge funds, this means they must report their investment plans to the government when acquiring substantial positions in companies.

The HSR Act requires parties involved in mergers or acquisitions to report their transactions to two federal agencies: the FTC's Premerger Notification OfficeFTC office responsible for receiving and processing HSR Act notifications and coordinating antitrust reviews. and the Department of Justice's Antitrust DivisionDepartment of Justice division responsible for enforcing antitrust laws and reviewing proposed mergers and acquisitions.. This reporting requirement applies when specific dollar thresholds are met, based either on the size of the businesses involved or the value of the intended transaction.

Unless a specific exemption applies, investors must comply with these reporting requirements regardless of their other investments. After filing the required notification, parties must observe a mandatory waiting period before they can complete the transaction. However, regulators may grant early terminationRegulatory approval that allows parties to complete a transaction before the mandatory HSR Act waiting period expires. of this waiting period in some cases.

Beginning February 10, 2025, new HSR FormThe notification form required under the Hart-Scott-Rodino Act that parties must submit before completing large transactions. requirements significantly expanded the information and documents that parties must submit with their premerger notification filingsRequired submission to federal antitrust agencies under the HSR Act before completing large transactions.. These changes substantially increase the time, cost, and administrative burden associated with HSR filings. At the same time, they provide antitrust agencies with much more detailed information about potential competitive concernsPotential anti-competitive effects that antitrust agencies evaluate when reviewing proposed mergers and acquisitions. and relationships between the parties involved.

These enhanced requirements mean that hedge funds subject to HSR Act reporting must now dedicate more resources to compliance and should begin their preparation process earlier when planning significant acquisitions.

The HSR Act uses specific dollar amounts to determine when transactions must be reported. These thresholds are adjusted annually to account for economic changes. Under the 2025 rules that took effect on February 21, 2025, transactions become reportable when an investor will hold voting securitiesShares or other equity instruments that provide holders with voting rights in corporate governance matters., assets, or ownership interests valued above $126.4 million.

The law also includes a size-of-person testHSR Act requirement that at least one party to a mid-sized transaction must meet minimum asset or revenue thresholds. for mid-sized transactions. For deals valued between $126.4 million and $505.8 million, at least one party must have total assets or annual revenues exceeding $252.9 million, and the other party must have total assets or annual revenues exceeding $25.3 million. This test ensures the law focuses on transactions involving substantial business entities.

For very large transactions valued at $505.8 million or greater, the size-of-person test does not apply. These deals are automatically reportable based on size alone. When investors make additional purchases of securities from the same company, they face higher reporting thresholds under special incremental acquisition rulesHSR Act provisions that set higher reporting thresholds when investors make additional purchases of securities from the same company..

The HSR Act provides several important exemptions that hedge funds can use to avoid reporting requirements, provided they meet specific conditions.

The most commonly used exemption for hedge funds is the investment purpose exemptionHSR Act exemption for acquisitions of 10% or less of voting securities made solely for investment purposes without activist intent.. Under this exemption, acquisitions that would otherwise require reporting are exempt if two conditions are met: the acquiring person will hold 10% or less of the company's outstanding voting securities after the acquisition, and the acquisition is made "solely for the purpose of investment."

However, this exemption has two critical limitations. First, it is not available to officers or directors of the company whose securities are being acquired. Second, investors who acquire securities with activist intentThe intention to participate in a company's basic business decisions rather than being a passive investor, which disqualifies investors from using certain HSR Act exemptions. cannot use this exemption. Activist intent means the investor plans to participate in the company's basic business decisions rather than being a passive investor.

Recent years have seen increased government enforcement against alleged improper use of this exemption. This has made consultation with specialized HSR lawyers particularly important when assessing whether the exemption applies to a specific situation.

Another useful exemption applies to pro rata acquisitionsA transaction where an investor acquires securities but does not increase their percentage share of the company's outstanding voting securities.. These are transactions where the investor acquires securities but does not increase their percentage share of the company's outstanding voting securities. This exemption most commonly applies to new rounds of venture capital financing, stock dividends, or stock splits, where existing investors maintain their proportional ownership.

The HSR Act excludes acquisitions of non-voting securities from reporting requirements. Non-voting securities include bonds, mortgages, other debt obligations, and non-voting common or preferred stock. However, this exemption does not apply if the non-voting securities can be converted into voting securities.

The HSR Act requires parties to pay filing fees when they submit notification forms. These fees are structured in tiers based on the transaction's value and are adjusted annually. For 2025, filing fees start at $30,000 for transactions valued under $179.4 million and reach $2.39 million for transactions valued at $5.555 billion or greater. The six-tier fee structure is designed to scale costs with transaction size while generating revenue to support the government's review process.

Fund managers should understand that the FTC must adjust HSR Act thresholds every year based on changes in the gross national productEconomic measure used by the FTC to annually adjust HSR Act reporting thresholds and other regulatory amounts.. This requirement was added by 2000 amendments to the Clayton ActFederal antitrust law that prohibits certain anti-competitive practices and includes provisions for interlocking directorates and merger review thresholds.. The FTC typically announces new thresholds in January, and they become effective thirty days after publication in the Federal RegisterOfficial journal of the federal government where agencies publish proposed and final regulations, notices, and other legal documents..

Failure to comply with HSR Act requirements carries significant financial penalties. For 2025, civil penaltiesFinancial penalties imposed by regulatory agencies for violations of laws and regulations, which can accrue daily until corrected. can reach $53,088 per day for each day of violation. These penalties continue to accrue until the violation is corrected.

The HSR Act's notification requirements extend beyond the immediate parties to a transaction. The law requires disclosure of competitive holdings by related entities, called associatesRelated entities that must be disclosed under HSR Act requirements, even though their holdings are not treated as direct holdings of the acquiring person., even though these holdings are not treated as direct holdings of the acquiring person.

This means a hedge fund may need to disclose whether it or a related fund holds interests in companies that compete with its acquisition target. Under FTC rules, any entity whose operations or investments are managed by the same management company is considered an associate. The management companies themselves may also qualify as associates.

Determining associate relationships requires careful case-by-case analysis. This process typically demands additional time and effort to gather and compile the required information, making compliance more complex for fund managers with multiple related entities.

Hedge funds that pursue activist strategiesInvestment approaches where funds buy significant stakes in companies to push for operational, financial, or strategic changes through direct engagement with management or proxy contests. face particular challenges under the HSR Act. Activist strategies often involve taking controlling positions in companies or seeking to influence management decisions. These approaches subject fund managers to additional regulatory obligations and limitations.

Managers pursuing activist strategies may face notification and waiting period requirements when purchasing company securities above the specified thresholds. The difficulty of qualifying for the investment purpose exemption makes compliance particularly challenging for activist investors, since their intent to influence company decisions typically disqualifies them from claiming they are investing "solely for investment purposes."

The FTC also sets annual thresholds under a separate provision, Section 8 of the Clayton Act, which prevents companies from having overlapping board members when it might reduce competition. For 2025, these thresholds are $51.38 million for Section 8(a)(1) and $5.14 million for Section 8(a)(2)(A).

These rules can affect hedge fund managers who serve on portfolio companyCompanies in which a fund has made an investment, typically through equity or debt securities. boards or who have relationships with companies that might compete with their investments.